Most people are familiar with what is called whole life insurance. In this type of insurance policy, the holder purchases a policy for a set amount each month. This monthly premium typically changes little, if any, over the course of the policy. The payout on these policies also is set at the signing of the contract.

Variable life insurance works a bit differently, however. In this type of policy, the policyholder buys the policy based on the investment of a certain amount of capital. This money then is invested in various stocks or mutual funds, depending on the insurance company offerings and the owner's choice, and the money earned through this investment is used to determine the payout for the policy.

This type of insurance policy works for people who have significant money to invest in the policy and who want a temporary tax shelter for that money. For other people, though, the variable life insurance policy is more work than they want in a life insurance policy. The whole life policies can be a better choice because they give a guaranteed payout and payment every month.

The variable life insurance policy has the potential to be worth more money, however, and has the benefit of being useful if the person does not want to pay for the policy indefinitely.

Variable life insurance policies have an interesting advantage over regular life insurance policies and investments. For the most part, money made through investments is taxed annually as part of a household's income. Because life insurance policies are intended to cover expenses and liabilities in the case of death, the federal government does not tax any money made from investing variable life insurance funds.

This tax advantage basically means that the life insurance policy can continue to earn money without the holder paying anything at the time. The money earned in one year continues to grow over time as the money is reinvested throughout the life of the policy.

Holders of variable life insurance policies do have the option of getting out of the policy, however. These policies have a "cash value," which is the amount the person can get at a certain point in time by cashing out the policy. If the person opts for the cash-out of the variable life insurance policy, then the government taxes all of the interest earned as income tax. Knowing how much of this money will go toward income tax payments is helpful in determining the real value of cashing out the policy or leaving it until one dies, then allowing it to roll over to the estate. These decisions can get very complex quickly.

The primary benefit of a variable life insurance policy is that the owner of the policy can opt to cash out the policy to receive money rather than waiting for others to inherit the money. With whole life insurance, you will lose out on any money you have paid toward the premium if you opt not to pay or cannot pay any longer. With a variable policy, however, you will be able to get certain cash value, based on the growth of the investments associated with the policy, if you need to cancel the policy.

Variable life insurance policies also grow so that you can get more money than you anticipated if your insurance company is able to offer sound investment choices for this policy. The insurance policy does not stagnate. With whole life policies, some people feel they are paying into a system without much choice in how much they are paying or how much they will get. With a variable life insurance policy, the policyholder is able to exert more control over the final dollar amount he or she will receive because of the investment property of the policy.

Another major benefit is that the money earned on investing the premiums is tax-sheltered instead of being taxed as household income as would happen with other types of investments.

Many different types of life insurance can be found on today's market, including universal variable life insurance, also known as a VUL. This type of insurance is very attractive to some because it is a protected insurance, one that will never lapse as long as payments are made on the account. A universal variable life insurance policy can not only produce great death benefits, but also cash and retirement ones in life, as well.